A Darwinian Approach to Investing

On this episode of The Long View, legendary Fidelity manager Joel Tillinghast breaks down the “art of investing,” his thoughts on artificial intelligence, and portfolio management.

Here are a few excerpts from Tillinghast’s conversation with Morningstar’s Christine Benz and guest host Adam Fleck.

Keeping Tabs on Portfolio Holdings

Christine Benz: I wanted to ask about the business of keeping tabs on the holdings in the portfolio. You have a large number of stock holdings, and you also typically maintain some non-U.S. stock exposure, and you tap into a huge team of analysts, more than 100 people supporting the fund around the world. How do you ensure that the analysts are channeling your way of thinking about things?

Joel Tillinghast: The Fidelity analyst job is really difficult because portfolio managers have different approaches, and they have different time horizons, and analysts have to serve them all. Sometimes I wonder whether I could do the analyst job today because there are so many portfolio managers to serve, whereas for me, serving Peter Lynch was job one, serving Bruce Johnstone was job two. Then there were half a dozen other portfolio managers who were very important, and I tried to do my best for them also, but it was a much shorter list than we have today. Once the analyst understands different perspectives, they find the approach that resonates with them, and I think that that’s critical. They’re looking in and saying you’re a value investor, and momentum makes more sense to me, but here are the facts that you need. And I try to push them to think longer term; I try to push them to compare price with value; I try to show by example that the best way to have a CEO meeting is to start with a strategy question and not ask about the quarter. And, in fact, save that for the CFO even if the quarter is catastrophic or awesome, start with the strategy that caused the catastrophe or boom time.

Peter Lynch’s Lessons

Adam Fleck: It’s a really great point. And you mentioned working with Peter Lynch. In your years working with him, what do you think was the most important lesson that you learned?

Tillinghast: I learned so much from Peter, and I think some of it is: be curious; be open-minded, always; be skeptical enough to spot your mistakes; be flexible enough to fix them quickly; and there’s no shame in making mistakes. I think there’s no shame in making mistakes as long as you recognize them and fix them.

Joel Tillinghast’s Legacy

Benz: When you think about your own influence on the firm and the people who will be there after you’ve retired, what do you hope your main lessons will be for them?

Tillinghast: I don’t think everyone will take them, but I’m hoping that Morgen and Sam [Tillinghast’s Fidelity Low-Priced Stock FLPSX comanagers Morgen Peck and Sam Chamovitz] especially will absorb that. Stick to the long view; compare price with value; think about risks that are not immediately in view; favor founder-led companies that offer something that customers think is very valuable. Dare to explore companies where management doesn’t give much guidance and where there aren’t many analysts. I think a lot of analysts are afraid to go where the management doesn’t spoon-feed them and Wall Street isn’t there to say, “3.45 is the consensus number.” Don’t hold too many highly path-dependent companies, especially if they don’t have moats. I hope that they’ll take some of that, especially take the longer view. We have an internal rating system, and one thing that I advocated for is “long-term winner,” where they do try to identify superior companies that will turn into compounders.

Was GameStop a Lesson for Young Investors?

Fleck: We’ve seen so much recently of that long term versus short term, maybe most highlighted by the meme GameStop GME situation. I know you were a holder in GameStop before all of that. Do you think that was a lesson for younger investors, that they need to be longer-term? Or are you worried those younger investors might not have the patience to actually hold some of these and really dig in?

Tillinghast: Patience is always the exception, and not just among younger investors. I have a shorter personal attention span than I had before social media and Outlook notifications. And I think more reflective investors of all ages will see that frequent trading on no information produces terrible results. And they’ll ask why and what they can do to fix it, and they’ll find an approach that works for them. The part that I worry about more generally is company managers who get caught up in short-term stuff and neglect the strategy.

Fleck: Not so much perhaps the investors, they’ll figure it out. But if it bleeds into feedback to the managers, now they have the trouble of destroying value, perhaps?

Tillinghast: The Darwinian approach that overstates the matter is if you do stupid things with your money, you’ll lose it all, and you won’t be a factor. Unless, as P.T. Barnum said, there’s a sucker born every minute. But I think most people don’t say I’m going to do something stupid. They try things and figure out what works. And I think the reflective ones will see trading all that much takes so much effort, and it’s hard to have an edge; try a different approach.